RBI may keep rates tight till further clarity on food inflation risk, say economists

Reserve Bank of India

The Reserve Bank of India (RBI) led Monetary Policy Committee (MPC) is expected to maintain interest rate higher or at the same level in the next monetary policy till there is clarity on the food inflation risk, economists said.

They further added that strong growth momentum provides a space to the central bank to keep rates on the higher side.

“Strong growth conditions have provided RBI policy space to remain on pause till there is further clarity on food inflation risks,” said Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank.

Adding to this, Sakshi Gupta, Economist at HDFC Bank said given the growth momentum, the RBI has space to keep rates tighter for longer.

On June 12, India’s headline retail inflation eased to 4.75 percent in May, data released by the statistics and programme implementation ministry showed.

The Consumer Price Index (CPI) inflation in April was at 4.83 percent.
In its latest policy review, the Reserve Bank of India (RBI) maintained its FY25 inflation projection 4.5 percent but added that food prices could continue to be sticky.

The central bank projected CPI inflation for Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent.

RBI Governor Shaktikanta Das in June monetary policy said the central bank remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation.

"Inflation is likely to ease further to sub-4% in the coming months before unfavourable base effects kick in from 2HFY25," said Madhavi Arora, Lead Economist at Emkay Global Financial Services.

On June 7, the RBI-led MPC left the key interest rates unchanged by a majority decision of the panel members, citing continuing risks on the inflation front.

The rate-setting panel, which has kept the rates on hold for over a year now, said it wants to see signs of retail inflation easing to a sustainable level before tweaking the rates. The repo rate, at which the RBI lends short-term funds to banks, stands at 6. 5 percent.

Inflation has been easing but not to the central bank's desired levels yet. India's retail inflation stayed largely unchanged at 4.83 percent in April against a 10-month low of 4.85 percent in March.